Slowing in wage growth will impact consumption

MUMBAI: Slowdown in the wage growth rates and high inflationary pressures will hurt the growth of consumer companies such as Hero Moto Corp, Bajaj Auto, TTK Prestige and Havells India.

According to a study done by CLSA, average wage growth has slowed down to 5% over the last two yeas as compared to a CAGR of 10% from FY07-FY11. Infact the CAGR for employee wage in the PSUs was 21% from FY07-FY11. This trend of slowing wage growth is likely to continue for the next one-two years due to a high base and the overall slowdown in the economy.

This along with the rising inflationary pressure has already caused a lot of unrest in the labor community. This is visible from the several labor union strikes in companies such as Maruti Suzuki, Bosch, Hawkins, Hero Motocorp and M&M. The inflation rate might take some time to settle down. A recent survey by RBI says that the household in urban India expect the inflation to grow at 14% over the next one year.

Even if the economy revives in the second half of 2013-14, wage hikes will take atleast some time and the pick up in consumption might take even longer. Considering this, the recovery in the consumption might take some time and investors should be cautious before investing in any consumer discretionary companies.